Number Theory: Demand, Welfare, Growth -The Budget’s Trilemma

Why in the News?

  • The National Statistical Office (NSO) released the first advance estimates for GDP for the financial year 2024-25 on January 7.
  • India’s economy is projected to witness a year-on-year (YoY) slowdown in GDP growth:
  • Growth rate for 2023-24: 2%
  • Expected growth rate for 2024-25: 4%
  • The YoY decline may not fully reflect the underlying challenges facing the economy, potentially leading to misinterpretations of its current state.

Analysis of GDP Growth in 2023-24 and 2024-25

Fiscal Consolidation vs. Actual Growth

  • GDP and GVA Differentiation:
    • GDP = Gross Value Added (GVA) + Net Indirect Taxes.
    • GVA reflects value addition across sectors and is a better indicator of actual production growth.
    • Net indirect taxes are indirect taxes less subsidies which means that a contraction in subsidies can generate tailwinds for GDP growth.

2023-24 Performance:

  • GDP growth: 2%.
  • GVA growth: 2%.
  • Net Indirect Taxes surged by 1%, the highest since 2009-10, primarily driven by a reduction in subsidies.

Number Theory: Demand, Welfare, Growth -The Budget’s Trilemma

Subsidy Reduction: Union government subsidies declined nominally from 2022-23 to 2023-24, reflecting fiscal consolidation post-pandemic.

Projections for 2024-25: Both GDP and GVA growth are projected at 6.4%, indicating:

  • A lesser slowdown in actual production compared to GDP.
  • Net indirect tax growth is expected to fall sharply from 1% in 2023-24 to 5.9%, contributing to the narrowing gap between GDP and GVA growth.

Understanding the Impact of Pent-Up Demand on Growth

  • Pandemic Disruption: The pandemic, particularly the two-month lockdown in Q1 2020-21 and the prolonged disruption of contact-intensive services, led to a significant economic contraction:
  • GDP contraction: 5.8% (2020-21).
  • GVA contraction: 4.1% (2020-21).

Number Theory: Demand, Welfare, Growth -The Budget’s Trilemma

Post-Pandemic Recovery Dynamics:

  • The contraction pushed the economy off its pre-pandemic growth trajectory, resulting in incrementally diminishing pent-up demand in subsequent years.
  • To understand this, year-on-year (YoY) growth must be assessed alongside the Compound Annual Growth Rate (CAGR) compared to pre-pandemic levels (2019-20).

Key Observations:

  • CAGR Trends: A rising CAGR (from pre-pandemic levels) has coincided with falling YoY growth, reflecting the dissipation of pent-up demand tailwinds.
  • 2024-25 Concern: GVA in 2024-25 is projected to grow by only 5% compared to pre-pandemic levels, highlighting the limited contribution of true growth beyond catching up to the pre-pandemic trajectory.
  • The 7%+ growth rates seen in recent years largely represent a recovery rather than sustainable economic expansion. This underscores the need to evaluate growth data with a focus on underlying fundamentals rather than just headline numbers.

Skewed Recovery Towards Less Employment-Intensive Sectors

Sectoral Contribution to GVA Growth (2019-20 to 2024-25):

  • Financial Services, Real Estate & Professional Services:
  • Accounts for 1% of GVA growth.
  • Employs just 9% of the workforce (2023-24 PLFS data).
  • Electricity, Gas, Water Supply & Other Utility Services:
  • Adds another 7% to GVA growth.
  • Employs a mere 5% of the workforce.
  • Combined, these sectors contribute 8% of GVA growth but employ only 3.4% of the workforce.
  • Income-Employment Asymmetry:
  • This structural issue reflects the disconnect between economic growth and mass employment generation.
  • Limited employment-intensive growth undermines mass demand despite headline GDP increases.

Number Theory: Demand, Welfare, Growth -The Budget’s Trilemma

Impact on Political Economy:

  • The reliance of a significant portion of the population on welfare benefits stems from insufficient growth in employment-intensive sectors, which impacts consumption spending.
  • Welfare benefits depend on revenue from low-employment, high-value sectors, creating a fragile economic balance.

Implications for the Budget:

  • Addressing this imbalance is crucial for fostering inclusive economic growth.
  • Policies need to focus on boosting employment-intensive sectors to enhance demand and reduce dependence on welfare support.

Source:https://www.hindustantimes.com/editors-pick/number-theory-demand-welfare-growth-the-budget-s-trilemma-101736911611918.html

Mains question

Discuss the challenges posed by income-employment asymmetry in India’s post-pandemic recovery and suggest policy measures to ensure inclusive and employment-intensive economic growth. (250 words)